Standardization, Customization and Revenue from Foreign Markets Peggy A. Cloninger Ziad Swaidan
ABSTRACT. This study develops theory and empirically tests the influence of heterogeneity (the degree of standardization or customization) of firm outputs on the globalization entry mode decisions, and receipt of revenues from foreign markets. To insure sufficient variance in the sample while also controlling for extraneous sectoral and national variables, this study obtained and analyzed cross-sectional data from 190 U.S. based firms in the environmental control industry. The findings indicate that the outputs of global firms are significantly less heterogeneous than the outputs of domestic firms, but that heterogeneity is not significantly related to the receipt of foreign revenues, or to the use of a higher control entry mode. These findings suggest that firms with more standardized outputs are more likely to globalize, but that standardization fails to help firms create any additional value in international markets compared to firms with more heterogeneous outputs. doi:10.1300/J042v20n02_06 [Article copies available for a fee from The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail address: Website: © 2007 by The Haworth Press, Inc. All rights reserved.]
KEYWORDS. Services, internationalization, customization, standardization, heterogeneity, revenues
As the value of international services has begun to surpass that for manufactured goods (Dunning, 1993; King, 2003; U.N., 1994b) the question of the degree to which service ventures must deliver a high level of customization (Campbell & Verbeke, 1994; Enderwick, 1989), versus standardized services continues to be debated (Raymond, Mittelstaedt, & Hopkins, 2003). It is generally accepted that businesses would prefer to maximize the benefits from standardization through globalization, but that this desire is stymied by the need
to develop products or services that will suit the foreign market (van Mesdag, 1999). Adding to the research complexity is the fact that the delivery of services and products is increasingly linked (Aharoni, 1993). To compete in today’s global market, firms often find that they must combine more services with their goods (Ansberry, 2003). There are few pure goods or services (Dunning, 1989; Hirsch, 1993; Shostack, 1977). The topic of Standardization-Adaptation (S-A) has been one of the most popular topics in international marketing. During the last
Dr. Peggy A. Cloninger is Associate Professor of Management, School of Business, University of HoustonVictoria. Dr. Ziad Swaidan is Assistant Professor of Marketing, School of Business, University of Houston-Victoria. Address correspondence to: Peggy Cloninger, School of Business, University of Houston-Victoria, 14000 University Boulevard, Sugar Land, TX 77479 USA (E-mail:
[email protected]). This research was funded in part by the Kauffman Center for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation. Journal of Global Marketing, Vol. 20(2/3) 2007 Available online at http://jgm.haworthpress.com © 2007 by The Haworth Press, Inc. All rights reserved. doi:10.1300/J042v20n02_06
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40 years a large number of articles were written in the area. Waheeduzzaman and Dube (2004) found that the Journal of Global Marketing published the highest number of S-A articles during the last few decades. Research examining the globalization of services, however, remains notably sparse (Capar & Kotabe, 2003; Clark & Rajaratnam, 1999; Coviello & Martin, 1999; Dunning, 1993; Lovelock & Yip, 1996; OECD, 1997; Westhead, Wright, Ucbasaran, & Martin, 2001). Studies examining the internationalization of services are frequently based on business theories developed and tested with manufacturing firms (Capar & Kotabe, 2003; Boddewyn, Halbrich & Perry, 1986). In addition, the degree of heterogeneity, (degree of standardization or customization) of actual firm outputs (whether service or good, or a combination), and the relationship between that degree of heterogeneity and revenues from foreign markets, remains relatively underexamined. From a theory building perspective, the influence of traditional service characteristics, such as heterogeneity, on international strategies and performance warrants further examination (Zahra, Cloninger, Yu, & Choi, 2004). Most studies that have addressed the question of adaptation versus “global” outputs have focused on the marketing mix rather than on firm outputs themselves. Most studies tended to focus on a single marketing mix element, frequently advertising (e.g., James & Hill, 1991; Raymond & Lim, 1996; Taylor, Wilson, & Miracle, 1994; van Mesdag, 1999; Zinkhan, 1994). Waheeduzzaman and Dube (2004) noticed that S-A studies started with advertising and later on integrated other elements of the marketing mix. Jain (1989) observed that 41% of the standardization/customization studies were in promotion area. Other studies also noticed the dominance of advertising in the S-A research (e.g., Laroche et al., 2001). Other standardization/adaptation research addressed product positioning and branding (e.g., Roth, 1992), and firm performance (Samiee & Roth, 1992). The S-A elements mostly have been categorized under the marketing mix components (i.e., product, price, promotion, and place). The notion of S-A has been perceived as two ends of
the same continuum (Laroche et al., 2001). The proponents of standardization emphasize the need, relevance, and benefits, of standardization (e.g., Quelch, 1999). On the other hand, those who favor adaptation suggest the value of adaptation (e.g., Boddewyn & Grosse, 1995). Between these two extremes many scholars prefer a moderate S-A approach. The moderate approach (contingency model) suggests that firms consider various factors at the country, industry, and company level before making any decision on standardization or customization (e.g., O’Donnell & Jeong, 2000; Ozsomer & Prussia, 2000; Solberg, 2000; Theodosiou & Katsikeas, 2001). Waheeduzzaman and Dube (2004) analyzed 130 S-A articles that were published over a period of forty years (1961-2000) in 26 peer-reviewed journals. They categorized the variables that affect the process of S-A into nine categories: product type and characteristics (e.g., Hult et al., 2000), brand image and identity (e.g., Grein et al., 2001), industry competition (e.g., Globerman et al., 2001; Lages, 2000; Schuh, 2000), company characteristics and strategy (Laroche et al., 2001; Ozsomer & Prussia, 2000; Solberg, 2000), economic environment (e.g., Cui & Liu, 2001; de Mooij, 2000; Theodosiou & Katsikeas, 2001), political environment (e.g., Kanso & Nelson, 2002), market characteristics (e.g., Moon & Jain, 2002; Tai & Pae, 2002), marketing infrastructure (e.g., Littrell & Miller, 2001), and market segmentation (e.g., Moon & Jain, 2002). This research focuses on firm outputs by examining the influence of heterogeneity (the degree of standardization or customization) of firm outputs on internationalization. Drawing on the Eclectic Theory, this research develops and empirically tests new theory in which heterogeneity is viewed as a necessary variable associated with ownership, internalization, and location advantages. Furthermore, this study recognizes the increasing linkages between services and goods. Heterogeneity is conceptualized, and tested, as a continuum on which a firm’s output, whether a service, a good, or more commonly, a combination of service and good, can be ranked from highly homogeneous (standardized with very little adaptation or heterogeneity) to highly heterogeneous (partially or totally customized). Specifically, this study
Peggy A. Cloninger and Ziad Swaidan
formulates theory and empirically tests three research questions: (1) whether or not the firm’s outputs intended for international markets are indeed significantly less heterogeneous (more standardized) than the outputs of domestic firms, (2) whether or not the degree of heterogeneity is related to the receipt of foreign revenues, and (3) whether or not the degree of heterogeneity is related to the use of a higher control entry mode, which may impact the ability of a firm to create value abroad. THEORY AND HYPOTHESES Consistent with the work of Berry (1980), Campbell and Verbeke (1994), Clark, Rajaratnam and Smith (1996), and Dunning (1989), services are defined in this research as deeds, performances, and efforts that provide benefits to customers. Traditionally, services have been characterized as inherently heterogeneous, as well as intangible, inseparable, and perishable, and these characteristics were thought to make internationalization more difficult, by hindering the ability of a firm to create ownership and internalization advantages. Although customization of a firm’s outputs has been considered an important competitive position variable (Edgett & Egan, 1995), such heterogeneity has also been assumed to make the creation of value internationally, fundamentally more difficult by making it relatively more difficult to control quality of the output, or to achieve scale advantages, relative to purely manufactured goods. However, there are few pure goods or services (Dunning, 1989; Hirsch, 1993; Shostack, 1977). Many scholars increasingly suggest that separating services and goods may be too simplistic (Arvidsson, 1997), or a “false” distinction (Dunning, 1989). What a firm often sells is a combination of a service and a good (Shams & Hales, 1989; Shostack, 1982). Many manufactured goods, for example, are accompanied by services such as customer service, design, distribution, and marketing (OECD, 1997), while many services are accompanied by, or embedded in, physical goods such as cash withdrawals from automatic teller machines. Thus, the theoretical segregation of services from products may have long been dysfunctional
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(Wyckham, Fitzroy, & Mandry, 1975). The distinctions between goods and services are more a matter of degree. Empirical research measuring intangibility, or “tangibles,” supports this view (Cloninger, 2004; Hartman & Lindgren, 1994; Parasuraman, Zeithaml, & Berry, 1988). Therefore, this research does not separate services and goods, but focuses directly on heterogeneity of the firm’s output, where heterogeneity is viewed as a continuum on which a firm’s output, whether a service, a good, or more commonly, a combination of service and good, can be ranked from highly heterogeneous to highly homogeneous. In other words, a firm’s output is not classified as a good or service per se, but rather as an output with some measure of the characteristic heterogeneity that can vary from very low (i.e., homogeneous or very standardized) to very high heterogeneous (very customized). Heterogeneity and Internationalization The eclectic paradigm contends that three advantages–ownership, location, and internalization (OLI)–explain international investment. Each of these three advantages plays a role in the creation of value in international production, and ultimately in the receipt of revenues from foreign markets. Although OLI was developed to explain foreign production of manufactured goods (Dunning, 1988), evidence suggests OLI is also applicable to service firms (Agarwal & Ramaswami, 1992; Arvidsson, 1997; Cloninger, 2004; Dunning & Kundu, 1995; Enderwick, 1989; Terpstra & Yu, 1988). Evidence suggests that the characteristics of services provided are likely to influence the extent, mode, and pattern of a firm’s internationalization beyond what is predicted by OLI (Dunning, 1993). In other words, the service characteristics (degree of heterogeneity, intangibility, perishability, and inseparability) of a firm’s outputs are likely to influence the ownership, internalization and location advantages on which the paradigm is based. This study examines the influence of one characteristic, the heterogeneity (the degree of customization or standardization) of a firm’s outputs on two of these advantages, ownership and internalization, and the result-
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ing influence on the creation of value in international production. Ownership Advantages. Ownership advantages vis-à-vis indigenous firms can only be profitable if the firm can maintain the advantage. As discussed, although customization is an important competitive variable, heterogeneity has traditionally been assumed to make it more difficult for a firm to maintain an ownership advantage over indigenous firms. Increasing heterogeneity makes it more difficult to control quality of widely varying outputs. Quality control is also likely to be difficult for many service firms due to the differences between service providers (Campbell & Verbeke, 1994; Dunning, 1989; Enderwick, 1989). Increasing heterogeneity is likely to make it more difficult to achieve scale advantages, relative to purely standardized outputs (Dunning, 1993). Whitelock and Pimblett (1997) concluded that there is evidence to support the growing trend towards product and brand standardization. Levitt (1983) declared that global companies must offer the same products in the same way everywhere. The above theory and findings suggest a positive relationship between globalization and standardization and a negative relationship between globalization and customization. In other words, global firms will have less heterogeneous outputs than domestic firms. Therefore, this paper hypothesizes that, Hypothesis 1. International firms’ outputs will be less heterogeneous than domestic firms’ outputs. In theory, claims for savings as a result of standardization and economies of scale are considerable. Still, empirical evidence to evaluate such claims is still lacking. Sorenson and Wiechmann (1975) reported that one company (out of twenty seven) provided evidence of savings that had resulted from standardization. Samiee and Roth (1992) mentioned that they were not aware of any attempt to validate the financial payoff of standardization. The issue is one of whether standardization can lead to improvements in profitability (Walters, 1986). A survey of industrial goods did not find a link between standardization and return on investment, return on assets or sales growth (Samiee & Roth, 1992). It is difficult to balance between
cost savings from standardization and potential sales that may result from adapting to local tastes. For the same reasons, firms that internationalize, but whose outputs are relatively less heterogeneous, will be more likely to achieve ownership advantages than firms whose outputs are relatively more heterogeneous. Less heterogeneous, more standardized outputs will make it easier to achieve economies of scale and control costs, and to maintain quality, ultimately protecting and enhancing the firm’s reputation. Evidence suggests, for instance, that the capability to reduce franchisee opportunism (i.e., control quality and reputation) is a predictor of overseas expansion for large U.S. franchisers across a variety of industries (Shane, 1996). Therefore, it is reasonable to propose that firms whose outputs are less heterogeneous are also more likely to generate a greater proportion of their revenues from overseas, either from entering more countries, or via a greater commitment in the country or countries they do enter. Therefore, Hypothesis 2. Firms whose outputs are less heterogeneous will receive higher revenues from foreign markets than firms whose outputs are more heterogeneous. Internalization Advantages. Internalization advantages occur when firms with ownership advantages can be more effective in transferring the advantages across national boundaries than the international market place. Quality control is also likely to be difficult for many service firms due to the differences between service providers (Campbell & Verbeke, 1994). Management and engineering consulting firms may each have internalization advantages due to the ability to control quality (Dunning, 1989). Internalization of key services may help firms’ control costs and protect quality (Kotabe, Murray & Javalgi, 1998). Alternatively, service firms also may seek to increase their legitimacy by affiliating with known organizations (Campbell & Verbeke, 1994). Thus, internalization may be driven by a need to maintain quality standards (Enderwick, 1989). Services that must deliver a high level customization may also have an incentive to
Peggy A. Cloninger and Ziad Swaidan
engage in collaborative or non-equity agreements (Enderwick, 1989). Therefore, Hypothesis 3. Firms whose outputs are more heterogeneous will choose higher control entry modes than firms whose outputs are less heterogeneous. Control Variables Scholars have suggested that several factors may influence internationalization. Therefore, this research collected data for three categories of control variables related to the organization (firm size), the top management (gender, nationality, credentials, motivations for internationalizing), and the host countries (cultural distance, transaction costs, size of the economy, and regulatory barriers). The data, however, did not permit all of the control variables to be retained in the analyses. Therefore, only “important” controls were retained, where important is defined as the predictor and dependent variable being relatively more highly correlated than the predictor and other predictor variables (Hair, Anderson, Tatham & Black, 1992; Nunnally & Bernstein, 1994). METHODS Study Design and Sample The overriding goal in the selection of the sample and the design of the study was to eliminate extraneous variables in order to more accurately measure and test the influence of heterogeneity on internationalization. The sample for this study had to insure sufficient variance in the heterogeneity of firm outputs while at the same time controlling for extraneous sectoral and national variables. Therefore, this study examined three types of young, U.S. based firms–manufacturing, engineering and technical services, and management and business services firms–founded between 1989 and 1996 in the environmental control industry. First, these three sectors should have distinctly different service characteristics. Although manufacturing firms increasingly use supporting services as well as produce service outputs (Dunning, 1993; U.N., 1990; U.N., 1996), their
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outputs are likely to be more standardized than for most services firms. Firms providing services like consulting are more likely than manufacturing firms to exhibit the classic service characteristics, and firms offering technical services may be diverse and deliverable via numerous methods such as video (Clark et al., 1996), and thus, be more heterogeneous than standardized firm outputs, but less heterogeneous than the “classic” services such as consulting. Second, these three sectors in this industry were expected to yield a high number of international firms for study. Demand has grown worldwide for businesses to adopt environmentally sensitive products and processes (Klassen & Whybark, 1999; Millstone & Watts, 1992; Porter & van der Linde, 1995a,b), and engineering and consulting are both covered by GATS (Mabile, 1995). Third, this sample controls the variance of many extraneous variables, and reduces the likelihood of random errors without decreasing the variance in the variables of interest. The U.S. is also highly prominent internationally in the environmental control industry (Engineer, 1996; U.S. Industry and Trade Outlook, 1998), and is the largest exporter of environmental goods and services (U.S. Industry and Trade Outlook, 1998). Finally, focusing on young firms minimizes the influence of organizational inertia (McDougall, Shane, & Oviatt, 1994). Evidence also suggests that, at least for manufacturing firms, newer firms are more likely than old firms to internationalize because of the characteristics of, and demand for, the product (Brush, 1995). Drawing on fourteen state and national listings, a comprehensive sampling frame consisting of 5,710 firms was developed. The national directories include the Gale Research Company’s 17th edition of Consultants and Consulting Organizations Directory (1997), the U.S. Department of Commerce, The Green Pages (1997), Dun & Bradstreet’s Directory of Service Companies (1998), and an on-line national directory, Enviro-net. Standard & Poor’s Register of Corporations (1998), and Dun & Bradstreet’s Million Dollar Directory (1998) were used to check additional secondary data, when available, to further minimize common method bias.
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The sampling procedure was to mail a survey questionnaire to every fifth firm in the published listings, unless the directory provided additional information, such as a firm’s founding date, in which case every firm in the directory that appeared to meet the criteria of the study was sampled. Using this procedure, 1,933 firms were sampled following the survey methods recommended by Dillman (1978). Of the sampled firms, 20% were undeliverable and 426 of the delivered questionnaires were returned. The response rate of 28% is fairly good for studies targeting new or small ventures (e.g., McDougall (1987) reported an 11% response rate and Brush (1995) reported 13%). Of the 426 questionnaires returned, 190 were fully complete, returned from firms founded between 1989 and 1996, and in one of the three sectors selected for the study. The sample did not exhibit any non-response bias. The final sample is believed to be highly representative of the industry. It consists of firms (a) located in each of the eight geographic regions designated by the U.S. Census, (b) doing business in each of the three sectors, and (c) founded each year between 1989-1996 (except for manufacturing sector that didn’t have any firms in the sample that were founded in 1992). International firms in the sample have entered countries in all regions in the world. The majority of firms were in the engineering and technical services sector, 68.4%, of which 20% were international, followed by the business and management services sector, 23.2%, of which 18% were international, and the manufacturing sector, 8.4%, of which 50% were international.
1992). Normal probability plots of the residuals are used to check the normality of error distributions (Neter, Wasserman, & Kutner, 1990). Multiple efforts were made to ensure validity of the instrument for measuring heterogeneity, which was assumed to be independent and continuous.1 Consistent with the recommendations in the literature (Hinkin, 1995; Nunnally & Bernstein, 1994; Schriesheim et al., 1993), multiple items based on the theoretical definitions were iteratively refined by using panels of experts. The final panel was able to successfully identify the service characteristics being tapped by the items with 91.9% accuracy.2 The understandability of the items and the questionnaire to the business public was also iteratively tested and improved, first via verbal feedback from several business owners and business students. Non-Response Bias. To the extent possible, non-response bias was assessed by comparing data available in the various directories, such as staff size, product description, geographic areas served and revenues, of responding and non-responding firms. Attempts were also made to contact some non-respondents for more in-depth comparisons. Comparisons were made qualitatively, not statistically, due to the differences in the data available in the directories. No noticeable differences were found between responding and non-responding firms. Consistency and Stability. The consistency of individual items was assessed using Cronbach’s Alpha. Stability was assessed by asking a small number of respondents to re-supply their answers at a later time via telephone. Measures
DATA Many newer ventures, especially service ventures, are small, private firms. Therefore, the primary data source is a self-administered, survey questionnaire of the firms in the sample. Such cross-sectional data is suitable for the research questions (Babbie, 1992; Cooper & Emory, 1995). All data used in the analyses are standardized so the regression coefficients are beta coefficients that allow direct comparisons of the relative effects of each independent variable on the dependent variable (Hair et al.,
The dependent variables are the receipt of foreign revenues (revenues earned outside the U.S.) and entry mode. The receipt of foreign revenues is measured two ways, by foreign sales growth and by international sales intensity. This multidimensional conceptualization of internationalization is consistent with the recommendations of Sullivan (1994). Foreign sales growth is defined as the mean growth of the firm’s foreign sales since the firm began to receive revenues from foreign markets. International sales intensity is defined as the ratio of
Peggy A. Cloninger and Ziad Swaidan
foreign sales from all foreign markets to total sales. It is operationalized as foreign sales in 1998 to the total sales revenue from all foreign markets and the U.S. market in 1998. International entry mode is defined as LOW and HIGH control modes, where LOW control modes are modes absent of ownership, such as exports, licensing, and franchising, and HIGH control modes, sales offices, joint ventures, and subsidiaries, which involve ownership.3 LOW control was coded as 0 and HIGH as 1. The independent variable is heterogeneity, defined as the degree to which a good or service is customized to meet customer’s needs (versus standardized), or varies due to differences in providers of services.4 Erramilli (1993) found that respondents could rate the degree of standardization better than customization, which they found more ambiguous to interpret and describe. Therefore, to measure heterogeneity, respondents were asked to rate how well four items (two related to standardization and two to heterogeneity) describe their company’s primary products or services, and calculating the net degree of heterogeneity uses of reverse coding. Reverse coding has not been found to be a problem (Hinkin, 1995). As shown in the Appendix, a 6-point scale was used to operationalize heterogeneity where 1 means the item is a very weak description, 5 means it is a very strong description, and N/A means the item is not descriptive at all. ANALYSIS AND RESULTS Factor analysis was used to provide evidence of content and construct validity (Nunnally & Bernstein, 1994). Principal components extraction was used, with the latent root criteria (eigenvalues greater than one), and varimax rotation.5 Standardized variables were used in all analyses since standard scores are easier to interpret, and they prevent scores with higher variance from having a heavier weighting in composite measures (Nunnally & Bernstein, 1994). Two items were retained, “Customized” and “Standardized.” Communalities were 0.76, and 0.92, respectively. Alpha was 0.68, which is very reasonable, given it is a very short scale and the communalities are relatively high.
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Hypotheses Tests Hypothesis 1. A one-way ANOVA testing the mean heterogeneity of the domestic and international firms found significant differences (p < 0.05) as shown in Table 1. The outputs of international firms are less heterogeneous, as predicted, supporting Hypothesis 1. Hypothesis 2. A series of hierarchical regression analyses was used to test the influence of heterogeneity on revenues from foreign markets, as measured by foreign sales growth and by international sales intensity. Heterogeneity was entered after the control variables so any change in R2 will be due to the addition of the heterogeneity. Only “important” control variables, defined as being more closely correlated with the dependent variable (p < 0.05) than with any other control variable, were used in keeping with the literature (Hair et al., 1992; Nunnally & Bernstein, 1994). Since normal probability plots of Foreign Sales Growth and International Sales Intensity (and of their residuals) show some deviations from normality, the logarithmic transformation of the variables, which are substantially normal, were used in the regressions. Table 2 shows the results for Foreign Sales Growth. Model 1 presents the base equation after the correlations were examined to determine the control variables. Two variables, transaction costs and marketing experience are included. The equation is significant (p < .01) and explains 28.6% of the variance in foreign sales growth. Heterogeneity is entered in Model 2. The equation is significant (p < 0.01) and explains 31.5% of the variance, a 2.9% increase over the base equation. The increase does not represent a statistically significant increase in comparison to the base equation. Hypothesis 2 is not supported. Table 3 shows the results for International Sales Intensity. Again, Model 1 presents the base equation, which is significant (p < .05) and explains 15.8% of the variance. When heterogeneity is entered, as shown in Model 2, the equation is also significant (p < .05), but explains only 13.9% of the variance. Therefore, Hypothesis 2 is not supported for either measure. Hypothesis 3. Hypothesis 3 is tested with logistic regressions because the dependent vari-
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TABLE 1. Mean Heterogeneity Scores 0.1020 ⫺0.3593 7.1876
Domestic Firms International Firms F Ratio
TABLE 2. Regression Models for Foreign Sales Growtha Foreign Sales Growth Model 1 Model 2
Dependent Variable Control Variables Transaction Costs Marketing Experience Independent Variable Heterogeneity F-value R2 Adjusted R2
0.486042*** 0.380273***
8.80717*** 0.32252 0.28590
0.503100*** 0.351783** ⫺0.214547 0.696624*** 0.36730 0.31457
as shown in Table 4. Model 1 presents the base equation where the “important” controls, defined as any control that is individually a significant predictor of the criterion variable as measured by a chi-square improvement over the initial likelihood function significant (p < 0.05), are firm size, management nationality, and management’s experience with new ventures. The equation is significant (p < 0.01) and over 90% of the predicted values are correct. Heterogeneity is entered in Model 2. The model’s chi-square improvement is not significant. Prediction does not improve and Hypothesis 3 is not supported. In this sample, heterogeneity does not influence the selection of a high control entry mode. DISCUSSION AND CONCLUSIONS
a
Logarithmic transformation *** p < 0.01 ** p < 0.05
TABLE 3. Regression Models for International Sales Intensitya Dependent Variable Control Variables Motivations Technical Experience Independent Variable Heterogeneity F-value R2 Adjusted R2
International Sales Intensity Model 1 Model 2 0.258588* ⫺0.346384**
0.256468 ⫺0.337939**
4.57830** 0.20277 0.15848
⫺0.066453 3.04746** 0.20711 0.13915
Support for Hypothesis 1 in this sample lends support for the premise of this research, that the degree of heterogeneity or standardization of firm outputs is an important variable in internationalization. The finding also appears to support the traditional view about the difficulty of internationalizing services which tend to be more heterogeneous. However, the findings that less heterogeneous outputs, that is, that more standardized outputs are not significantly related to either foreign revenue earned or to the selection of the entry modes, raise the important question of why international and domestic firm outputs differ if there is no
a
Logarithmic transformation *** p < 0.01 ** p < 0.05 * p < 0.10
TABLE 4. Logistic Regression Models
able is dichotomous rather than metric. The coefficients in logistic regression are measures of the changes in the odds ratio, the ratio of the probability of the event indicated by the dependent variable divided by the probability of no event. Equations can be compared by examining the difference between the ⫺2LL, which is the change in the predictive fit from one equation to another, and by the chi-square statistic indicating the improvement relative to the base model. Classification tables compare the predicted values versus the observed values, and report the percentages correctly predicted
Dependent Variable Control Variables Size Nationality New Ventures Experience Independent Variable Heterogeneity 2 Log Likelihood a Chi-Square Improvement Percent Correct a
Entry Mode Model 1 Model 2 2.6865 0.3669 0.5948*
61.582 30.655*** 90.53
2.7364 0.3320* 0.5402* 0.2143 61.213 0.369 90.53
For Model 1, improvement relative to initial log likelihood function; for Model 2, improvement relative to Model 1. *** p < 0.01 * p < 0.10
Peggy A. Cloninger and Ziad Swaidan
measurable improvement in financial performance. These findings, that standardization fails to help firms create any additional value in international markets compared to firms with more heterogeneous outputs, confirms past findings that there is no link between standardization and return on investment, return on assets, sales growth (Samiee & Roth, 1992), or better returns (Whitelock & Pimblett, 1997). In competition with other international companies, it seems unlikely that little price differences coming from standardization and scale economies would have significant impact on purchase decisions. Usually production costs form only a small proportion of total costs, when savings from standardization are translated into price reductions they may have little impact in the marketplace. More important perhaps is that scale of economies may fund greater expenses on other marketing activities, but the findings do not support these assumptions. Future research is needed to determine if these findings are artifacts of this sample, or to investigate if firms with heterogeneous outputs that choose to internationalize are able to mitigate the effects of heterogeneity. For example, heterogeneous services like consulting may be able to overcome lack of economies of scale by generating relatively greater revenues per transaction. Evidence suggests, for instance, that purchasers of professional services do not appear to be very price sensitive (Mitchell, 1998). Similarly, firms offering services whose quality cannot be determined until after their purchase due to information asymmetries between the buyer and seller have been found to earn relatively higher revenues (Nayyar, 1993). The primary motive for S-A, however, must be to gain competitive advantages, and the effect of S-A should be translated in some kind of realistic performance measures (e.g., revenue, sales). Yet, research today points to mixed results at best. Waheeduzzaman and Dube (2004) concluded that studies that explore the relationship between S-A and performance are lacking. S-A, as a research topic, has drawn substantial interest, but we do not know the phenomenon very well on global basis. In addition, most studies have been conducted in North America. We need more studies in emerging economies
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and developing countries (Waheeduzzaman & Dube, 2004). We also need multi-country and longitudinal studies. Advances in technology of transportation and communications make these collaborations and comparisons more feasible. Another possibility that should be explored in future research is that entering new markets may offer opportunities to achieve economies of scale or scope (Lovelock & Yip, 1996; Nayyar, 1992), even for high heterogeneity outputs. Perhaps many parts of the value chain do not need to be duplicated allowing for scope advantages, while some activities may be standardized allowing for scale advantages. Yet another possibility for future research relates to the continued existence of trade barriers and legal differences which continue to vary more for services, especially for professionals, which vary from country to country (Snape, 1993). It is possible that it is simply more economically viable to ship manufacturing overseas and to keep higher skilled, service jobs at home (Ansberry, 2003), or that international firms simply have the resources to overcome differences in the heterogeneity of their outputs while domestic firms do not. In any case, the findings that international firms have less heterogeneous (more standardized) outputs, but that heterogeneity is not related to either foreign revenues or entry mode is intriguing. Future research needs to develop and test theory related to organizational, strategic, and/or marketing mix variables and their relationship with the service characteristic heterogeneity (i.e., mediating, moderating, etc.). NOTES 1. Factor analysis was used to test the assumption that the four accepted service characteristics–heterogeneity, intangibility, perishability and inseparability (simultaneity)–are four independent dimensions. Discriminant validity was assessed by examining how items loaded on their own factor and other factors, and by examining the inter-correlations of items. The resulting scales have been used successfully to examine the influence of intangibility on revenue for foreign markets, and the influence of service characteristics on international market entry mode (e.g., Cloninger, 2004).
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2. This figure applies to the entire instrument which was designed to measure heterogeneity, intangibility, perishability and inseparability. 3. If a firm indicated they entered a country using two or more modes, such as exports and joint venture, the entry mode was listed as HIGH control if any mode listed involved ownership (sales offices, joint ventures, or subsidiaries). 4. This definition ensured a more complete theoretical coverage of heterogeneity. It also helped ensure that multiple items were included in the initial factor analysis. 5. The final factor analysis applied to the entire instrument designed to measure heterogeneity, intangibility, perishability, and inseparability, yielded a four factor solution with nine reliable items that explained 73.5% of the variance. Communalities were all fairly large, ranging between 0.64 and 0.87 indicating that the factor solution extracted a large amount of variance.
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doi:10.1300/J042v20n02_06
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APPENDIX The operationalization of heterogeneity is derived from the definition, that is, the degree to which a good or service is customized to meet customer’s needs versus standardized, or varies due to differences in providers of services. To measure heterogeneity respondents were asked to rate how well four items (two related to standardization and two to heterogeneity) describe their company’s primary products or services. Calculating the net degree of heterogeneity uses reverse coding. This has not been found to be a problem (Hinkin, 1995). For each item, a 6-point scale was used where 1 means the item is a very weak description, 5 means it is a very strong description, and N/A means the item is not descriptive at all. The questionnaire items to measure heterogeneity are shown in Table 5.
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TABLE 5. Questionnaire Items 1. Customized for the individual customer. 2. Standardized for all customers. 3. Independent of differences in individual skills, firm facilities or equipment. 4. Variable due to differences in individual skills, firm facilities or equipment.
Items 1 and 4 are derived from Hartman and Lindgren (1993) and Erramilli (1993). Items 2 and 3 are designed to tap any variability due to the provider. Using factor analysis, items 1 and 4 are expected to load positively on the heterogeneity factor. Items 2 and 3 are expected to load negatively. Two items were retained, “Customized” and “Standardized.” Communalities were 0.76, and 0.92, respectively. Alpha was 0.68, which is very reasonable, given it is a very short scale and the communalities are relatively high.
